The Next Big Thing in Smartphones? The Software
January 11 2017 - 8:29AM
Dow Jones News
By Betsy Morris
Nearly a decade after taking off, the smartphone is at a turning
point.
Advances in hardware have become incremental, and growth in
handset sales has largely stalled. But the development of software
and services on the phone is booming, driven largely by advances in
artificial intelligence, expanding what the devices are capable of
and making them increasingly indispensable.
The change is roiling the industry. Slowing growth has
intensified a market share war in China and has pitted Huawei
Technologies Co. -- the world's third largest smartphone maker --
more directly against market leaders Apple Inc. and Samsung
Electronics globally.
It also is a major reason behind chip giant Qualcomm Inc.'s
pending purchase of NXP Semiconductors NV for $39 billion, as it
looks to diversify beyond supplying chips for smartphones. And it
is the reason Apple -- famed for its hardware -- is boasting about
growth in its services.
After Apple unveiled the iPhone a decade ago this week, global
sales of smartphones sales soared for years, with unit shipments,
for instance, growing as fast as 75.8% in 2010 from the year
before. But shipment growth had slowed to 10% by 2015 and is
expected to increase by 0.6% in 2016, according to International
Data Corp. Rival research firm Gartner Inc. estimates higher sales
growth of 4.5% in 2016, compared with 14.4% in 2015, but projects
that sales of premium smartphones such as the iPhone and Samsung's
Galaxy S series will fall 1.1%.
Several factors are sapping the smartphone market's momentum.
With 1.45 billion smartphones sold world-wide in 2016, according to
IDC, much of the global market is saturated. In the U.S., wireless
carriers lately have moved away from offering subsidies in exchange
for signing long-term contracts to requiring customers to pay full
price, which begins at $649 for a new iPhone 7. So consumers are
waiting longer to replace their smartphones: Citigroup estimated
the handset replacement rate lengthened to 31.2 months by third
quarter last year from below 24 months in 2011.
And while phone makers lately have added features like second
camera lenses and waterproofing, few analysts expect major new
hardware advances that could drive sales growth beyond single
digits in the foreseeable future.
"The question is: can there be something else to get sales going
again," said analyst Gene Munster, who recently left Piper Jaffray
to start a venture-capital firm. Some features that could juice
demand are still likely years away, such as truly foldable glass
displays that would allow a phone-tablet combination to fit in your
pocket, or a dramatic improvement in augmented reality that would
take it beyond rudimentary games and into practical uses like
figuring out if a chair you want to buy would fit into your living
room.
While hardware advances have been less exciting, software is
changing at head-spinning rates, driven by advances in how
computers process giant amounts of data using
artificial-intelligence techniques. Those have enabled big leaps in
vision and speech-recognition software that have led, among other
things, to much improved versions of virtual assistants such as
Apple's Siri, Amazon.com Inc.'s Alexa, and Alphabet Inc.'s Google
Assistant.
Amazon's Echo speaker, which uses Alexa, and Snap Inc.'s new
Spectacles, camera-bearing sunglasses, are examples of what
Benedict Evans, partner at venture-capital firm Andreessen
Horowitz, calls "frictionless computing" -- easy-to-use devices
that unite applications with hardware beyond smartphones.
Ben Schachter, senior analyst at Macquarie Capital, says: "Our
view is the next big innovation will be from outside the device --
from the software." He expects increasing use of such software to
meet entertainment, health-care, home innovation and automotive
needs.
Though Apple touted its newly launched iPhone 7 on its last
earnings call in October, the star was its services business, which
includes Apple Pay and the App Store. Services revenue grew 24%
from a year earlier to $6.3 billion during the latest quarter --
still only about 22% the amount from the iPhone, but iPhone revenue
fell 13%. Chief Executive Tim Cook said the services business has
nearly doubled in the past four years, on track to be the size of a
Fortune 100 company in the current fiscal year, which ends in
September.
A lot of Apple's smartphone success has resulted from its
control of both its hardware and its software. Now Google is
emulating that. The company for years focused its mobile efforts on
developing free Android operating system software, which runs 85%
of global smartphones shipped each year. But in October it launched
its own Pixel phone.
For other hardware companies, the battle for market share is
getting increasingly intense as the pie grows more slowly. Huawei,
which doubled revenue in the past five years, wants to be the No. 1
smartphone maker in five years and is competing at the high-end of
the market. It introduced its pricey Mate 9 phone (costing $776 in
Europe) last month in Germany. The company also launched Honor 6X,
aimed at millennials in the U.S. and at a more affordable starting
price of $249, to positive reviews at the Consumer Electronics Show
in Las Vegas last week.
"The smartphone is changing. It is becoming the control device"
for home speakers or television when one can't find the remote,
said Raj Talluri, senior vice president of product management at
Qualcomm. "The phone becomes the hub."
Write to Betsy Morris at betsy.morris@wsj.com
(END) Dow Jones Newswires
January 11, 2017 08:14 ET (13:14 GMT)
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